Small businesses still wary of government assistance

-- Deborah L. Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com --

By Deborah L. Cohen

CHICAGO (Reuters.com) - John Currin wishes last week's announcement that the Obama Administration was increasing loan amounts to small businesses had come a few months earlier.

Currin, the co-owner of Kansas-based startup Husky HydroVac that uses high-pressure water excavation to repair of gas, pipe and fiber optic lines, recently secured a $1.8 million government-backed loan through the U.S. Small Business Administration, but conceded he could have used "another quarter of a million." Currin said he needed the money for payroll, utilities, insurance and fuel for his trucks.

The government wants to get more capital in the hands of cash-strapped entrepreneurs, like Currin, and President Obama has called on Congress to redirect some of the remaining Troubled Asset Relief Program (TARP) funds to help small businesses. The President is pushing to lower interest rates to encourage small banks to lend to more businesses and to increase loan maximums under SBA lending programs. The moves would boost the top limit of many of the SBA's 7(a) and 504 loans from $2 million to $5 million and raise microloans from $35,000 to $50,000.

"We're really cutting ourselves short," said Currin, who applied for his loan three months ago under the 7(a) program, the SBA's largest. Currin said his house and property are now riding on the company's future. "If this $5 million (limit) was in effect, it would have pretty much guaranteed success."

Small business financing may finally have the political momentum needed to make a difference to many still struggling on Main Street. Already bills have been introduced into Congress to support the White House financing initiatives and several trade groups have shown support. But for some in the small business community, the moves may come as too little, too late. These business owners have endured a near two-year lock-down in the capital markets, including difficult and lengthy loan application procedures that often end in rejection. They have watched the government rescue Wall Street banks, as their own companies struggled. The experiences have resulted in lack of confidence.

John Benthal, owner of the Mission Motif, an Atlanta retailer featuring craftsman-style home furnishings, said he was an early enthusiast of the SBA's American's Recovery Capital (ARC) program, which was unveiled in June to offer a limited pool of hardship loans of up to $35,000.

With a profitable business, Benthal thought he was a good candidate; he had intended to use the relief funding to alleviate debt and purchase equipment for his store. He was so hopeful about the plan that he promoted it through several Atlanta-based small business groups. But Benthal was rejected following a "painful application" and has since had to tighten the purse strings at his three-man operation.

"Everyone I recommended this to was turned down," added Benthal, noting that the latest SBA initiatives are "not going to matter because the banks are not on board." "They still consider it too much risk," he says. "Increasing the limit is not going to solve the problem."

BETTER SENTIMENTS

Benthal is not alone in his doubts.

"You can't get past the monkey at the gate," said Geri Westphal, the owner of Ciao Bella Day Spa, which she opened in September 2008 in Littleton, Colorado. Westphal said she attempted to get SBA financing through a half dozen banks before she resolved to bootstrap her business with personal savings and home equity. "It has to be the banks that change and really become reasonable," said Westphal, who added her spa was close to posting break-even results when she sought government financing. "What I'm asking for is a small amount of money."

Maximo Perez, owner of BCW Engineering & Manufacturing, a family-run producer of maintenance support equipment for the transportation and airline industries, said the effort required to apply for a government loan was so arduous it distracted him from the essential duties of running his struggling company.

"I went to several banks and most of them knew nothing about the ARC loans," said Perez, who operates the 25-year-old San Jose, California business with his two sons and a part-time worker. "I never went back," said Perez, who said he was rejected for a $35,000 ARC loan by J.P. Morgan Chase. "I've been putting in some of my own money."

An October poll by Discover Small Business Watch found that small businesses are "clearly not interested in Small Business Administration loans." Among the reasons cited by the poll, which surveyed 750 companies with less than five employees, were unfamiliarity with the programs and the time commitment involved in applying. Overall, the economic confidence of these companies remained unchanged from September. Forty percent said they were "very likely" to tap personal assets over the next 12 months to keep their businesses alive.

The SBA, which has been boosting its profile through new promotions on the Internet and social media sites, is confident the President's recent proposed initiatives will expand access to capital. The agency is already showing signs of improving loan levels due largely to Recovery Act provisions.

"These steps will help keep our loan products relevant in the current economic market," said SBA spokesman Jonathan Swain, who noted that in September the agency posted its highest lending volume since August 2007. Still overall SBA lending is down 36 percent this year from 2008 levels. "The support on the Hill for this seems to be very positive. The reaction from the small business community and the lenders seems to be very positive as well."

Small banks, which administer the majority of the loans, likely need more convincing before they budge. Banking leaders conceded that there are still large hurdles to overcome.

"The risk to making small business loans is very high," said Paul Merski, chief economist for the Independent Community Bankers of America, which is supportive of the Obama Administration's latest proposals. "For lenders to overcome that risk you're going to need some big incentives. They are good steps and with a little bit of additional detail and work on these programs, they're going to be beneficial."